How Liens and Second Mortgages May Legally Affect Foreclosure
When it comes to mortgages, a homeowner can seek multiple loans secured against their property. In order to organize and prioritize multiple mortgages, the law has created a system for determining which lenders’ debts take priority over others. For example, if Bank A authorizes a home loan on a property on January 1, and Bank B authorizes a loan on the same property on June 1, Bank A takes priority over Bank B. In this example, Bank B’s loan is the secondary mortgage on the property. In the event the homeowner defaults on Bank A’s loan, and the property is sold in foreclosure, Bank A would be entitled to recoup its outstanding debts before Bank B. If there are any funds remaining following the satisfaction of Bank A’s loan, Bank B is entitled to those funds.
In some regions, a mortgage obligation secured against a property is referred to as a lien. Using the same example, Bank A’s mortgage loan would constitute the primary lien, while Bank B’s mortgage loan would constitute the junior lien. The same rules regarding prioritizing and repayment of the loans apply even when this terminology is used.
Mortgage Rights Vary From State to State
Liens are typically prioritized by recording date, but notice and the nature of the lien may also affect priority.
Each state has adopted different rules for how banks need to declare their mortgage rights. In some jurisdictions, loans are prioritized based on the order in which they are recorded at the county recorder’s office for the county in which the property is located. In other jurisdictions, facts regarding when a bank learned of another bank’s mortgage, which is called notice, are also considered. In general, banks are very diligent about complying with these rules and ensuring that their mortgages are recorded quickly and appropriately. For potential buyers, it is critical to look up any recorded mortgages against a property before making a purchase. Some sellers do not disclose this information, or they may not even be aware of all the mortgages against their property. Knowing the legal obligations attached to the property before entering into a purchase agreement can prevent a major headache down the road.
Despite the seniority of a primary mortgage, a secondary mortgagor can foreclose on a property even if the primary mortgagor has not initiated a foreclosure proceeding. Typically, it does not make financial sense for a secondary mortgagor to foreclose on a property unless the home will sell for enough money to pay off the primary mortgagor and still have funds left over to cover the secondary mortgage. There are some situations, however, in which the secondary mortgagor gains seniority over the primary mortgagor by purchasing the primary mortgagor’s debt. Whether a secondary mortgagor will purchase a primary mortgagor’s debt depends primarily on how much the property is worth.
Naturally, there are many instances in which the lender of a second or even third mortgage does not receive repayment on their debts. This can occur through foreclosure or even bankruptcy. Since these secondary and tertiary mortgages are so high-risk, they typically involve much higher interest rates than primary mortgages. There are some banks that allow a homeowner seeking a second mortgage to enjoy an open line of credit against the equity in their home. These open-ended mortgage agreements can result in substantial debt for the homeowner, however, especially considering that there is a primary mortgage in addition to the secondary mortgage.
A homeowner may continue to be responsible for the debt that remains unpaid after a foreclosure, even though the lien is removed from the property's title.